Nevro Corp (NVRO) 2017 Q2 法說會逐字稿

Good afternoon. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nevro Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Thank you.

Katherine Bock, Senior Director of Corporate Development and Investor Relations, you may begin your conference.

Thank you, Sheryl, and thank you all for participating in today's call. Joining me are Rami Elghandour, President and Chief Executive Officer; and Andrew Galligan, Chief Financial Officer. Earlier today, Nevro released financial results for the quarter ended June 30, 2017. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during the call that include forward-looking statements within the meanings of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements including, without limitation, are examination of operating trends, expectations with regards to future product enhancements and releases as well as our future financial expectations, which include a full year 2017 revenue and expense guidance based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed on February 23, 2017, and our quarterly report on Form 10-Q, which we expect to file today. Nevro disclaims any intention or obligations, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 7, 2017.

And with that, I'll turn the call over to Rami.

Thanks, Katie, and thanks, everyone, for joining us today. As you may recall, we released a preliminary range of expected revenue for the second quarter 2017 on July 5. Worldwide revenue for the second quarter was $78 million, an increase of 41% as reported compared to the same period of the prior year. U.S. revenue for the quarter was $63 million, an increase of 55%, and international revenue was $15 million, which represents a 4% increase on a constant currency basis. These results were driven by the continued global adoption of HF10 therapy and execution by our outstanding commercial team. We remain confident in both the near and long-term outlook for our business and are reiterating our worldwide revenue guidance of $310 million to $320 million for the full year 2017.

As we discussed on our Q1 earnings call in May, we have taken steps to improve commercial execution as we grow our sales organization to broaden access to HF10 therapy. In Q4 2016 and Q1 2017, we expanded our U.S. sales management and are now in position to support the current scale of our growing sales force. The strength of our sales organization was reflected in our results in the second quarter. As we previously announced, our VP of Sales is no longer with the company, and we are conducting a search. I'm extremely confident in our sales management and look forward to adding a new sales leader consistent with the values and caliber of our existing team. Given Nevro's success and profile, we are attracting exceptional candidates, and I look forward to making this addition to further bolster our team.

On the hiring front, in the U.S. we ended the second quarter with 259 hired and trained sales reps, a net increase of 27 reps from the previous quarter count of 232. In the first half of the year, we doubled down on our hiring efforts and are pleased with the quality of the sales talent we have added to our team. In Q2, similar to Q1, we continued to see new reps ramping as they hit the 12- and 15-month mark. Again, this is indicative of the quality of our sales team as well as the appreciation in the market for the difference HF10 therapy provides. Given the bolus of recent new hires, we have taken time to digest and focus on execution with our existing sales force. As a result, you can expect the rate of increase and the number of reps hired and trained to slow in the back half of the year.

Internationally, we ended the quarter unchanged at 71 sales reps trained and in the field, and we will continue to add sales support as needed. As I mentioned earlier, our commercial execution in Q2 and the momentum we are carrying into the back half of the year gives us confidence in our business. HF10 therapy has touched the lives of over 20,000 patients and enabled physicians around the world to make a broader and more meaningful impact in their communities. Our commercial performance is also reflected in the confidence it inspires in our team and the physicians we support.

Over this past quarter, I learned that we had mothers of both team members and physicians receive HF10 therapy with great success. These inspirational stories are a reflection of the real power of HF10 therapy, and what those most (inaudible) believe when it comes to treating a loved one.

Our commercial strategy has centered around bringing Level 1 evidence to the SCS market and driving the market towards evidence-based decisions leading to better patient care, healthcare utilization and coverage. At the core of this strategy is the SENZA-RCT, our first-in-class comparative randomized control study demonstrating clinical superiority to traditional SCS therapy for back and leg pain. We're proud to share that the SENZA-RCT received a distinguished designation of Top Pain Paper of the Year by Neurosurgery, the official journal of The Congress of Neurological Surgeons. This recognition is a reflection of the landmark data generated by Dr. Kapural and the SENZA-RCT investigators. This is valued recognition of the importance of comparative prospective long-term RCTs in advancing patient care and a reflection of the groundbreaking nature of the study and the impact it is having on the field of neuromodulation and chronic pain.

Our minimally invasive non-opioid therapy is revolutionizing pain treatment given its superior efficacy and elimination of side effects associated with traditional SCS. This improvement over the prior standard of care is driven by what we believe is a different mechanism of action by which HF10 therapy works, underpinning our success in the market.

We have demonstrated through our clinical studies and real world experience the superiority and differentiation of our product. Ultimately, this translates to giving patients their life back. The story of one of our SENZA-RCT patients was recently featured in an MIT Technology Review Article regarding how technology could curb the opioid epidemic. I had the opportunity to meet Terry, the patient featured in this article, last year and learned firsthand, as the article highlights, how HF10 therapy has personally touched her life. Terry has now had HF10 therapy for nearly 5 years, since 2012, a reflection of the durability of our therapy. Stories like Terry's inspire us every day to fulfill our mission to deliver breakthrough evidence-based therapies that transform patients' lives.

Shifting gears to R&D, we have continued to make meaningful progress in expanding our product portfolio in the second quarter. First, with regard to paddle, feedback continues to be very positive as we work to expand access to the surgeon community. With respect to our new smaller IPG, we remain on track to launch this product in the next 9 months. Nevro's next-generation IPG will have a smaller form factor and will provide a number of benefits to our patients, physicians and business. Finally, we continue to make progress on conditional full-body MRI compatibility for our current Senza system and expect approval in the next 12 months. Similar to our current MRI compatibility for the head and extremities, our design goal, pending regulatory approval, is to have the conditional full-body compatibility retroactively apply to every patient implanted with the Nevro system.

We have also continued to make meaningful progress on our clinical pipeline. We are leveraging a platform applicability of our therapy to expand access to many more patients by building out Level 1 evidence in new indications. In the second quarter, we initiated the SENZA-PDN, the largest ever randomized controlled trial evaluating spinal cord stimulation for the treatment of painful diabetic neuropathy or PDN. We anticipate enrollment will begin this month and the trial, which is enrolling up to 360 patients, will evaluate the safety, clinical efficacy and cost-effectiveness of HF10 therapy in PDN patients. Key inclusion criteria includes pain lasting longer than 12 months and lower limb pain scores of at least 5 centimeters on a 0- to 10-centimeter pain scale.

For PDN patients today, conventional medical management, or CMM, consists of treatments such as Lyrica, or pregabalin, and Neurontin, or gabapentin, that are widely prescribed but have limited efficacy for this large population. We believe there is a large clinical unmet need for a therapy that can provide these patients with long-term pain relief. In this study, we are comparing HF10 therapy plus CMM versus CMM alone. At the 3-month primary endpoint, we will evaluate responder rates comparing the number of patients who received at least 50% pain relief between the treatment groups. Patients will be followed up for 24 months.

The study has a steering committee comprised of a neurologist, an endocrinologist, an interventional pain physician and a health economics expert who guided us in the study design. This study builds on the clinical evidence from the small multicenter post-market study on peripheral polyneuropathy using HF10 therapy that we first presented in January 2017 at the 20th Annual North American Neuromodulation Society meeting in Las Vegas.

One of our additional learnings in conducting these studies relates to referral pathways, which are informed by enrollment rates. We will keep you updated on our progress and timelines as we learn more in that regard.

Transitioning to reimbursement, last month, the 2018 CMS SCS proposed reimbursement rates were published. The facility rates were increased or were largely unchanged, representing stability in the current reimbursement landscape. Medicare facility reimbursement for trials increased 3.8% in the ASC setting and 4.2% in the hospital outpatient setting.

Medicare facility reimbursement for permanent implants in the ASC setting increased 1.4% for implants with percutaneous leads and 0.8% for implants with surgical leads. In the hospital setting, reimbursement remained relatively flat at an increase of 0.3% for both percutaneous and surgical lead implants. CMS typically publishes the final reimbursement rates in mid-November of each year, and we will provide an update if there are any changes at that time.

Finally, an update on the ongoing litigation with Boston Scientific initiated by Nevro in November of 2016. The trial date has been updated to begin in October 2018, previously July 2018.

In closing, I'm incredibly proud of the Nevro team as we continue to put patients first and focus on expanding access to HF10 therapy to those in need. Our exceptional commercial team continues to execute at the high standard at which they are capable. Our clinical team is launching important clinical studies that will further expand the reach of HF10 therapies in areas of unmet need. As I've said in the past, evidence is our product, and in that regard, our product pipeline is quite robust.

Additionally, our R&D team is delivering on key updates such as conditional full-body MRI compatibility that will further position the superiority of our product in the field.

With our continued focus on innovation, people, culture and long-term strategy, I believe we are well positioned for leadership in the field of neuromodulation. And with that, I'd like to turn the call over to Andrew Galligan, our CFO, for a more detailed review of our financials. Andrew?

Thank you, Rami. Revenue for the 3 months ended June 30, 2017 was $78 million, an increase of 41% year-over-year on a reported basis. This increase was primarily due to the continued global adoption of HF10 therapy. U.S. revenue in the second quarter was $63 million, up 55% from $40.6 million during the same period of the prior year.

International revenue was up 1% to $15 million from $14.8 million during the same period of the prior year. This represents a constant currency growth rate of 4% for the quarter and 16% year-to-date. As we have previously stated, we believe that the international market is subject to capitation constraints, which has resulted in a moderation of our international growth rate. Given our size in the international markets, we are seeing this impact. We continue to expect that our international growth rate for the full year will be in the high single or low double-digits.

Gross profit for the second quarter of 2017 was $53.9 million or 69% gross margin as compared to $36.6 million or 66% gross margin in the same period of the prior year. Gross margins increased year-over-year, primarily due to fundamental cost improvements. Operating expenses for the second quarter of 2017 were $63.8 million, an increase of 50% compared to the second quarter of 2016. The increase in operating expenses was primarily driven by personnel-related expenses related to scaling the organization to support the increasing size of our business. Legal expense in connection with the Boston Scientific litigation was $4 million for the quarter. Net loss from operations for the period was $9.9 million compared to $5.9 million for the second quarter of 2016. At the end of the second quarter of 2017, we had $263.3 million in cash, cash equivalents and short-term investments.

Turning to our outlook. We are reiterating our worldwide revenue guidance for 2017. As we said in early July, we continue to anticipate worldwide revenues for 2017 to be in the range of $310 million to $320 million. We expect productivity in the range of an average of $1.3 million to $1.5 million per rep after 12 to 15 months. For gross margins in 2017, we still expect to end the year at approximately 70%, excluding any material write-downs of inventory. With regard to our operating expenses for 2017, we expect to end the year at the high end of our previously provided range of approximately $230 million to $240 million in operating expenses, excluding litigation expense, which year-to-date has been approximately $6.5 million.

Now back to Rami.

Thanks, Andrew. So that will conclude our prepared remarks for today. Sheryl, please open up the call for questions.

(Operator Instructions) Our first question comes from the line of Mike Weinstein of JPMorgan.

So as a starting point, Rami, I'd like you to talk a little bit about the market. If we look at this quarter, the first half of the year, it's pretty clear that the U.S. SCS market has further accelerated versus growth in 2016 and certainly 2015. And so as a starting point, can you just talk a little bit about what you think is going on in the market and any views on sustainability?

Sure. So I think there are 2 factors really driving the growth in the SCS market. And they both certainly, I believe, are related to our entry into the market. I think the first, obviously, as we've discussed, we have both the ability to take share as well as expand the market by treating those back pain patients that were previously largely untreated. And certainly, as we continue to grow, our impact on the market growth rate should increase as well. I think the secondary fact indirectly is obviously our disruptive entry into the market has certainly caused some of our competitors to also invest in, the market in ways I believe they hadn't necessarily been as invested in the past. And that certainly is a good thing long term for the market. So I can certainly attest to our intent and confidence in our ability to continue to do our part to continue to grow. And I think that will be a good catalyst for the market going forward.

You talked in the first quarter call about some of the challenges of growing your sales force and managing that transition to a larger sales force and you thought that showed up in the first quarter. Can you just talk now in retrospect to how you feel about the third -- second quarter progress? Obviously, the fact that you continued to hire as aggressively as you did in the second quarter is an encouraging statement from the outside. And (inaudible) just looking about how you're feeling about the business. But how do you feel about the sales force right now and kind of what you saw in the second quarter relative to the first?

Sure. Look, I mean, I said earlier I'm happy to expand more. I feel great about our sales organization worldwide and certainly in the U.S. I think their performance showed up very much in the second quarter. As we talked about in our Q1 call, we felt like we could have executed better. I think with our continued ability to invest in our sales management as well as the confidence we have in our sales team, we showed that in second quarter. And I feel really good about all the progress we made and certainly feel great about the performance. And we're a get better every day kind of company, so I do expect this to continue to get better. It's never perfect. There are always areas where you wish you can improve no matter what the score is on the scoreboard. So as great as our performance was and as proud as I am of our team, I do want to make sure that I emphasize that we do and expect to continue to get better as well.

Last item and I'll let some others jump in. Can you just comment on the paddle lead launch? How would you describe where you are at this point in that launch in terms of introducing it to both existing customers as well as new customers, which is a big part of the opportunity? And how does that impact the second half of the year versus the first half? And then I'll wrap.

Sure. Look, I think everyone who is familiar with the Nevro story knows that we do everything in a very controlled fashion. So we're still in the earlier stages of our paddle launch. We certainly have had great experience and great feedback on the product. And we're very excited to bring it to the neurosurgical community but certainly in the early legs of that. And I do want to emphasize again, to the latter part of your question, that for us it's less about kind of a relaunch, if you will, similar to when we first launched in the U.S., and more about being able to fully access the entirety of the market and to basically move our rollout in a way that makes the most sense for us and not be constrained by things like sight of care for implants or availability of a specific product. So we feel really good about having the paddle and the feedback that we've gotten, in that it allows us to have the flexibility to operate our business in the way that we want going forward.

Your next question comes from the line of David Lewis of Morgan Stanley.

Just a few quick ones from me. Rami, can we just start on the PDN trial. Obviously, you're moving into a pivotal here above other targets. So should we assume this is the most compelling market opportunity or market expansion opportunity that you have? And can you give us a quick update on the ULN labeling strategy?

Sure, David. So I think we've talked about this in the past as well and I think more clarity perhaps is needed. When we evaluate different target indications we look at a number of things. We look at our, first and foremost, our opportunity to make a difference and actually improve from an efficacy profile and the current standard of care. We look at regulatory and labeling questions or opportunities and we certainly look at reimbursements. So I would say when you look at the combination of those factors, that indication certainly seemed to rise to the top for us and we're very excited about it, both from an opportunity to make an impact in an area of unmet need; the regulatory path, where we believe is straightforward; as well as the potential for reimbursement down the road. As far as ULN, we talked about having 3 studies in that area that we're continuing to follow up. And our strategy from a regulatory perspective would be to do our best to leverage that data as an initial footprint and moving that indication closer to broader adoption.

Very helpful. Just maybe one for you and then one for Andrew. I'll give them both to you right now. Rami, just thinking about the second half of the year momentum, obviously you've got significant rep hiring in the last 3 quarters. They're going to be more seasoned into the back half of the year. You'll be deeper into the paddle lead launch. So it seems like there is momentum in the second half of the year. Are there any headwinds that you'd want to call out or we should be aware of? And then for Andrew, I know you raised OpEx to the top end of the range. Just considering how well gross margins are doing and how much cash is on the balance sheet, why not spend even more in 2017 and in 2018, I can't believe I'm saying that, but in this particular case, why not just continue to increase that rate of investment? And I'll jump back in queue.

I'm going to give Andrew an opportunity to compose himself after that question. Look, David, we feel really good about our business. I'm not sure there's anything in particular I would call out. I think seeing that reimbursement continues to be stable is great. We feel really good about where the business is heading. I have a lot of confidence in our team. So there isn't anything in particular outside of kind of the normal day-to-day challenges that you always work through that I would particularly note here.

Okay. Having recovered, so I think spending is -- it's a combination of maintaining balance. And I think, as you can tell, back in the first quarter we, frankly, got a little bit out of balance. So the whole thing is to grow under control and not to lose control. So it's -- we're trying to grow as fast as we can without wasting money by getting, again, out of control. So we do constantly look at can we put more money to work, but then also are, I think, asking ourselves sharper questions about can we actually manage and do we have the infrastructure to go faster than we're going. But it's an...

Okay. The rate of spending is not controlling your growth in your view?

No. No.

Your next question comes from line of Bob Hopkins of Bank of America.

Just 2 quick questions if okay. First, the second quarter results here obviously suggest that the sales management issues that impacted you in the first quarter are behind you. But I just wanted to kind of formally ask the question. Is that the right way to look at it, that the Q1 issues are now entirely behind you? Do you have the right mix of middle managers relative to reps in the field? Is there any more movement that we can anticipate? Or is this, again, is this issue just really completely behind you at this point?

We feel good about where we are. I mean, certainly I think the lesson learned here is we need to make sure that we keep our growth in the sales management level consistent with our overall growth of the field team. And so I don't want anyone to kind of take away that it's stable in that regard. Obviously, we're continuing to hire sales reps, so we're going to have to continue to scale sales management accordingly. It was something that we were doing in the prior quarters, but they got a little bit out of lockstep. So we feel we're in a pretty good position today, but it's certainly something we'll continue to monitor and do better with on a go-forward basis. And then I'll comment on -- from a VP of Sales perspective there's -- that is the only change that we're making in terms of sales management. And I said it in the prepared remarks. I feel very confident in our sales management globally, and there's is no other changes there that are even remotely considered or thought of at the moment other than replacing that position.

That's helpful. And then just the second question, I just want to get an update, Rami, from you or from Andrew on kind of the competitive dynamic out there. Obviously, we're seeing Abbott do pretty well right now with their burst launch. Again, we talked about this a little bit on the last call, but from a competitive standpoint, things sort of calmed down since the first quarter, a little bit more orderly. Just wanted to get your sense for the competitive dynamic and then also just what you're seeing from the players beyond Abbott?

Look, I think we generally have taken the tack of not commenting on competition. I think all we can speak to is our performance. Like I said before, we were very confident and very happy with our performance in Q2. And it's hard for us really to kind of weigh in on what other folks are doing and what specific tactics they're employing. All we can say is it's not really impacting us, I think, as we demonstrated in the second quarter. So we don't see really a lot of whatever is working for other folks really kind of weigh in on what we're doing in our performance.

Your next question comes from the line of Danielle Antalffy from Leerink Partners.

Rami, I was wondering if you could comment on how to think about the transition until we get a new -- or until you guys get -- I work at Nevro now -- until you guys get a new VP of Sales, how you'll handle that and ensure continued successful execution that you saw in Q2?

Honestly, we're going to handle it the way we've been -- we handled it this past quarter effectively. So I think we're -- obviously our VP of Marketing as well as myself is involved with our global sales management team, and I think we're going to continue to manage it. And like I said, I have a lot of confidence in those folks. They've been doing the job and they've been doing really, really well. So I think we'll be in a good spot.

Okay. And you think that that's sustainable for the next quarter or the next few quarters?

Yes, absolutely.

Okay. Great. And then just a question on the cadence now throughout the -- for the remainder of the year. You commented on slowing rep hires, but presumably some of the new rep hires -- or some of the rep hires over the last 4 quarters will be coming to full productivity exiting 2017 and into 2018. So is it right to think of an acceleration in rep productivity over the next few quarters? Or how should we be thinking about that? And by acceleration, I mean not just increasing absolute dollar value but an acceleration and the increase in rep productivity sequentially. Because based on my math, it was about mid-single digits this quarter versus last. So just trying to think about how we should be looking at it.

Danielle, it's Andrew here. So we always think of our rep productivity as a journey to where they get, in 12 to 15 months, where they get to their $1.3 million to $1.5 million. At that point, they're kind of maxed out in actually how many patients they can deal with. So that's why our business really is a combination of the layering on of the new hires that we make and their progress up the productivity ladder. So and as you, I think, correctly pointed out, a lot of those people hit the really productive part on that ladder in 2018, which gives us confidence moving forward into 2018.

Your next question comes from the line of Dave Turkaly of JMP Securities.

I was just wondering, just to start with one maybe on the addressable market as you stand today. Looking at your slide, I think it's the fourth page of your presentation, you kind of show leg and back and back pain, and it appears that they're a lot larger than, let's say, the standard leg pain market. But I don't know if you've talked about sort of the size that you see, this label that you have today of chronic intractable pain of the trunk and limb. I mean, do you look at that opportunity today being north of $5 billion? Or I guess any thoughts around what you think you're targeting just based on what you have today?

I think what we've said in the past is that, if you look at the U.S. portion of the market, which is whatever it is, $1.2 billion to $1.4 billion, somewhere in that range, if we can continue to drive a double-digit growth rate in that market for 5 to 7 years, then you could potentially maybe double that market segment. So if the total worldwide market is around $1.5 billion $1.7 million and you can add maybe another $1 billion to it, then you're looking at a -- maybe a 3-ish…

3 plus.

3 plus sort of billion dollar market. And there is nothing that has kind of changed our view that, that is possible. There are certainly other things that can come into play that can further add growth to that market, but conservatively that's our -- I shouldn't say conservatively. But we're sticking effectively with our initial view at this point based on everything we've learned in the market.

Great. And then as a follow-up, you've mentioned that differentiated mechanism of action. I know I've seen some presentations at conferences like WIP did. You showed some research on different frequency. I'd just love to get your thoughts. I mean, I remember one presentation where the doctor had looked at sort of varying the frequency and starting at something like 1,000 hertz or whatever going up to 10,000, but that it seemed like it actually started to work better as you approach that 10,000. And I know you've done a lot of research around specifically that number, why Senza operates where it does, but just to refresh our minds on -- your thoughts around how 10,000 works so well and maybe what you've seen at different levels in terms of your -- the efficacy of your device?

Sure. I think, certainly from an evidence perspective, we have our landmark RCT to rely on. We have now 20,000-plus patients who have benefited from this therapy. We've presented data from the U.S. on 2,500-plus patients who have benefited from the therapy. And honestly, there have been studies like the Medtronic-sponsored study internationally that looked at a variety of different frequencies, which also demonstrated that 10,000 hertz was better than lower frequencies.

So there's a multitude of clinical evidence supporting our position, both from us and otherwise, that 10,000 hertz is truly differentiated. As to why that is, you alluded to a presentation earlier. I don't want to spend a lot of time on kind of scientific discussion, but the short colloquial version is, rather than using paresthesias to distract from pain, we seem to believe that we're influencing something called central sensitization or the mechanism by which pain patients become hypersensitized to sensation, which leads to this chronic pain state. We believe we may be influencing that mechanism more directly and that leads to both the more profound pain believe that we're able to deliver as well as the lack of paresthesia.

Your next question comes from the line of Joanne Wuensch of BMO Capital Markets.

This is Matt Henriksson in for Joanne. Can you guys hear me okay?

Sure.

Yes.

Okay. Great. So first, with regards to the potential new VP of Sales, just going a little deeper into that topic. What characteristics are you looking for, for a new hire? Is it an internal or an external hire? Are you looking at both fields? And then kind of what is the time frame for the replacement?

So the time frame, I'll start with that, is when we find the right person. We are conducting an external search, as I mentioned. And what we're looking for here is someone who is going to fill that role, who is going to engage directly in the field with both our team and our customers and who is someone who is going to be able to meet the demands of the scale of this organization based on our expectations. We feel like we have immense potential, as we just discussed, not just with our primary product but with this incredible potential in terms of our pipeline and platform. And we need somebody who has the scalability, the cultural fit and the intensity to fill the entirety of this role, which also has a lot to do, obviously, first and foremost with our field team and our customer base.

Okay. Great. And then just as a follow-up for the whole sales rep team in general, have you noticed anything qualitatively about sales reps needing to spend more time with each doctor to maintain relationship as the competitive environment increases?

I think that's a great question. And we've kind of alluded to this tangentially with respect to the importance of sales management on our prior call, that there are a number of necessary touch points, both from our sales team as well as our sales management team, with our customer base, and that extends up to the VP of Sales as well, as I just talked about. So I do think that, that is a critical part of sales in medical devices in general and something that we certainly continue to have a focus on.

Your next question comes from the line of Larry Biegelsen of Wells Fargo.

One on the diabetic nephropathy trial. According to ClinicalTrials.gov, Rami, the trial is expected to be completed for their primary endpoint in December of 2018, which is pretty fast and encouraging and implies enrollment by, let's say, September of 2018. My question is, how would you characterize that? Is that aggressive? Conservative? Realistic? And I had one follow-up.

Sure, Larry. Look, I think we've put our best guess on here, on there, and we're hopeful that we'll be able to meet that timeline. As you know, there's a lot of variability in studies: how quickly you can get the sites up and running, how well they enroll relative to their expectations and so on. So we're certainly hopeful we can meet that timeline, and anything beyond that would be upside.

Sure. And then one on just kind of the future technology, if you will, or pipeline, your level of interest in DRG technology, or adding some additional technology to the bag?

Sure. We're interested in adding therapies, not necessarily technologies, to our bag. We're interested in adding therapies that provide an improvement to patients over the current standard of care. We believe that there is a multitude of opportunities with our current platform that we'll continue to talk about as time goes on. There is a lot of early feasibility type studies that I think, as they mature, and hopefully demonstrate positive effect, we'll talk about more. But we're really a lot less interested in adding technologies and particularly things that are more cumbersome from an implanting perspective, or have higher adverse event rates or things of that nature to our portfolio. We're really interested in therapies that help patients and offer physicians the opportunity to have a greater impact in their communities.

Your next question comes from the line of Margaret Kaczor of William Blair.

First off, you guys had a pretty strong quarter of sales rep hires. I mean, as you think about the second half of the year, I know your rate of change is going to slow, but how should we think about the first half-second half ratios? Is 70-30 in the ballpark? Are you really not going to try to hire very much at all? And is there some way that, that goes higher or lower, and what could that thing be?

If I understood your question correctly, Margaret, it's not that we're not going to try to hire at all. It's that we're not -- we have already -- remember, let's step back, you guys are, as I kind of joked, you're always on tape delay, right, because you're seeing our hired and trained reps, not necessarily how many we’ve just hired only. So obviously in Q2 there was a great focus, particularly new sales management and focus on execution to really double down to make sure that we get our boat back on track. And we certainly did that, but it comes at some cost, that we probably weren't as focused on hiring that quarter as we had in the past. So that is necessarily going to impact the 3 -- when we report next quarter kind of the higher number there. We'll certainly get it back ramping up again, but as we do that, it's going to take time. And I don't think you should anticipate that we won't hire any. There will certainly be hires. We have territories to fill, and there's a lot of interest in joining Nevro, but it's probably not going to be at the historical rate that you've seen the last couple of quarters.

Okay. Great. And then as a follow-up, in terms of the diabetic neuropathy market, we found data that, at least in terms of the number of patients, there could be as many as 9 million diabetic neuropathy patients. But as you guys look at it, as you guys have done your data digging, how many of those patients do you think actually have pain scores high enough to participate in your trial and how many of them are actively going into a physician's office looking for treatment?

Sure. Look, I think your number is not that far off from our number. Any time you're trying to introduce a device therapy to treat something that is generally pharmaceutically treated, it's kind of hard to estimate what the eventual narrow end of the funnel looks like. But we do think that it's a number that is measured in low single digit millions of patients. It's not a small number. And it likely is a bigger number than ultimately the chronic pain population from an addressable market perspective. So that's one data point. The other data point is that we are looking at a market where there are multibillion dollar drugs here. So it's not a -- and ones that don't seem to work that particularly well. So the refractory population here is going to be fairly significant. So I think those are some of the kind of things that make us encouraged about this in our early research, coupled with the fact that enrollment in our pilot study went actually fairly well. Now a lot of times when you expand that, you don't quite see the same effect, so that's why -- we learn just as much, frankly, from a market dynamic perspective as we do from a clinical perspective when we run these studies. I don't know if you recall, our RCT back and leg pain enrolled in about 6 to 7 months, which was a very bullish sign for us and certainly has translated into a very attractive market opportunity here. So we're going to monitor and kind of learn what that flow looks like and where those patients are coming from, how easy it is to get them in this larger study. And I think that'll give us, in addition to a lot more market research, put us in a position to better answer your question as time goes on.

Your next question comes from the line of Jason Mills of Canaccord Genuity.

It's David (inaudible) on for Jason. Can you guys hear me all right?

Yes.

Yes.

I think I have one for you guys, and the genesis of it really kind of comes out from our favorable SCS survey we put out this morning. Can you talk maybe a little bit more about kind of customer engagement strategy as far as to kind of categorize it, maybe in the kind of different volumes of implants? Like are you guys looking as far as, when you bring reps into the field, are they kind of targeting high-volume reps, or they have a mix of different reps that -- from a volume perspective that do it? Or when you kind of have a new rep coming out from training, are they kind of starting off with the high-volume reps and then working their way down? Maybe just a little bit more color on the penetration you have in the different volumes of reps.

Just to clarify, you're speaking about how we sort of segment and prioritize physicians -- new physicians to approach?

Right, yes, as far as kind of from a segmentation within volumes of high volume, medium volume or low volume implanters.

Yes, so our approach has never been to prioritize predominantly on volume. I mean, certainly volume is one thing we look at. But more than anything we look at experience and interest in clinical evidence and clinical outcomes. We try to really find physicians who are similarly inclined. And sometimes that means that you're in the middle or lower sort of scale in terms of volume. But I think one of the things that our therapy allows us to do is, because of the efficacy in a broader set of patients, it can allow a physician to go from one kind of volume scale to another while still maintaining very attractive outcomes and high success rates. So we're not as constrained really by volume. We certainly prioritize other factors, other things like influence in a particular community as well. That might drive us to prioritize one particular account over another. And certainly it takes 2. So I think the physician interest on the other end certainly also helps drive which accounts to go to first, et cetera. There's obviously different adoption interest at different points in time. Some are earlier to adopt relative to others, and that certainly helps as a deciding factor as well.

And then kind of a follow-up to that, I think we're kind of looking at -- or as far as rates of trial implant ratios, what kind of are you seeing as far as the trial implant ratio is kind of going forward? Or what you have been seeing in the trial of permanent implants?

No changes. It's pretty steady.

Your last question comes from the line of Suraj Kalia of Northland Securities.

So Rami, 2 quick questions. One is, and forgive me if you've mentioned this, just hopping in between calls, for the PDN trial, have you indicated at what level HF10 is going to be used? And the second part of my question is, some of the past SCS studies in PDN, they've also reported what I would consider relatively conflicting information on depression, sleep scores, in essence saying the pain scores improve but quality of life was not that improved. Any color you all can provide us as to how you all intend to tackle that in your PDN trial?

So in terms of your first question, no, we did not comment on the exact location from a stimulation perspective. In terms of your second question, we have a range of secondary outcomes that we are looking at in the study and certainly will hopefully have a good view on other quality of life impacts for these patients. As I mentioned in the prepared remarks, we're also certainly evaluating cost effectiveness, and a big part of driving that will be quality of life improvements, not just changes in pain scores.

There are no further questions at this time. I will turn the call back over to the presenters.

Thanks, Sheryl. And thank you once again for joining the call today. We certainly appreciate your continued interest in Nevro, and look forward to our next progress update. Have a great day.

This concludes today's conference call. You may now disconnect.